The Federal Reserve Does The Expected - March 20, 2013

The Federal Reserve, which has provided few surprises in recent years, as it has continued to press forward with unprecedented monetary accommodation in an ongoing effort to breathe additional life into the often slumbering U.S. economy, continued along that path today.

Specifically, the central bank, in maintaining that the U.S. economy has strengthened following a brief pause in late 2012, suggested within the past hour, that the economy still needs extraordinary support to help it materially lower the current jobless rate, which stands at a still-elevated 7.7%.

Thus, in a statement after its two-day FOMC meeting, the bank indicated that it plans to stand pat on keeping short-term interest rates at record low levels at least until the unemployment rate falls to 6.5%. That is an ambitious target, especially in light of the slow pace of the jobless reductions thus far. Meanwhile, the caveat is that the inflation outlook remains mild.

As to its thinking, the Fed did acknowledge that the employment situation was improving. In fact, the aforementioned 7.7% jobless rate, which the economy reached in February, was the lowest in more than four years. Also, recent data showed that core inflation, which backs out the volatile food and energy components, remains muted, thereby enabling the Fed to not be pressured by cost concerns--at least right now.

Although the statement issued by the bank was more of the same, the Fed did suggest that the economy was acting a bit better. In late 2012, readers will recall, that growth nearly ground to a halt, as the nation's gross domestic product rose by a scant 0.1%. The quarter's initial estimate issued in late January, had noted a decline of 0.1% in fourth-quarter GDP. A final fourth-quarter revision is set for next week.

As to the latest FOMC statement, it implied strongly that growth was stepping up. Indeed, after we had earlier surmised that growth might have to struggle to reach 2% in the fast-concluding quarter, we now sense that GDP will comfortably surpass that modest total and even approach the 3% mark. The bulls would seem to be getting the best of both worlds, that is, better economic growth and an accompanying easy monetary policy. Little wonder then that the bull market has been raging onward.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.